Data Availability - The New Value Proposition of L1s?

Smart contract blockchains like Ethereum used to base their value on their capability to execute code and act as the world’s computing engine. However, with the transition towards Layer 2s as the point of interaction and scalability solution, L1s are being used less and less for execution and more for storing data related to L2s. This shift towards data availability is one of the hottest narratives of the past several months, and some DA solutions have seen their tokens increase by over 5x in the past month. In this article, we’ll define data availability, explain why it’s important and hot, and look towards the future of blockchain computing.

Before Layer 2s, Ethereum’s advantage over other chains was the Ethereum Virtual Machine - the part of the blockchain that allows it to execute smart contracts and arbitrary code - and the amount of liquidity in its smart contracts. However, in the previous bull market, it became apparent that Ethereum was not ready for mass adoption and had serious scalability issues, costing upwards of 10$ to do a simple token transfer. To achieve greater scale while inheriting similar security and decentralization levels, the idea of the Layer 2 rollup was conceptualized. 

Rollups work by abstracting blockchain transactions into their two individual parts, data storage and computation execution, and optimizing how they are done. Computation, which is expensive on a decentralized blockchain, is instead done off-chain in a cheap centralized environment. A cryptographic proof to prove that the data was processed correctly is posted to the blockchain, which allows anyone to quickly verify that, given the set of inputs, the off-chain compute engine outputs the correct outputs. One question remains: how do we know that the off-chain engine used the correct data? For that reason, it is necessary to also post all of the transaction data to an on-chain environment, allowing anyone who so desires to re-execute the transaction and check for fraud. It also has the added bonus of allowing users to query for state-specific information, such as account balances, which would otherwise be unavailable. 

Storing the rollup data on-chain is known as data availability, and has become a very popular topic in the Web3 industry recently. With the growing amount of rollups and app-chain solutions, there is a need to reduce the cost of data availability and support more of it. Right now, on Ethereum, for example, data is stored as the ‘calldata’ storage type, meaning that it’s quite expensive and stored by validators forever. A new upgrade, called EIP-4844, introduces a new storage type called ‘blobs’ specifically meant for storing L2 data. The data automatically expires after 1-3 months, meaning that anyone who wants to verify the data or download it for posterity can, but it won’t clog up the Ethereum chain with unnecessary data. In practice, this might decrease the cost of using rollups by 20x for users.

However, EIP-4844 and blobs are not the only proposed DA solutions. Several other projects, both new and old, are creating new solutions for data availability in hopes that they can capture some revenue from L2s. For example, Celestia, a recently launched Cosmos SDK-based network, aims to be a cheap and efficient DA layer for any and all chains. The excitement surrounding the project has made the token, which was airdropped at around $2, now worth over $12 in less than two months. Other projects, like NEAR, have modified their existing offerings to include DA features. Another notable project, EigenLayer, is planning to launch its EigenDA service sometime relatively soon, which would allow Ethereum validators to opt into supporting DA for L2s in exchange for greater staking rewards. 

The concept of using L1s and their massive distributed validator set effectively as redundant storage space is an extremely interesting concept that is completely unlike the previous value proposition for L1s. In some sense, it creates more modularity and flexibility for rollups, as they can choose whichever DA layer they like with little to no consequences for their end users. That being said, this makes the L1 DA space more competitive, and protocols will compete based on fees, scalability, and liveness/uptime. 

It is very difficult to anticipate how L2s will choose their DA layer. On one hand, it may seem obvious that L2s already on Ethereum would stay, but if there are cheaper solutions that give them a competitive edge, while not impacting their user experience, why wouldn’t they pivot? The main risk with other services is some sort of outage or downtime, which is historically rare on Ethereum. Additionally, zero-knowledge L2s can still use Ethereum to verify the proofs of transaction execution by posting them to an Ethereum-based smart contract verifier, which retains high levels of security at a significantly lower cost than DA.

The interest in data availability layers is incredibly hyped by both investors and layer 2 architects, and the competition is just beginning. As Celestia collects more partners, Ethereum releases EIP-4844, and the other solutions begin to release and pitch projects, the L2 DA landscape will become increasingly competitive. The best bet on DA would be a bet on the several different projects in the space, as each has pros and cons that may or may not be the reason the next billion-dollar L2 chooses them.

By Lincoln Murr

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